India, the World’s Largest Kleptocracy

My brother came to visit me at our offices in Lower Parel in Mumbai this afternoon. He was duly impressed by the spanking new buildings that occupy what used to be Morajee Mills land. I guess I can understand why he was impressed because usually he ends up in seedy run-down offices trying to do business. He has a bunch of dealerships for equipment and materials required for large-scale public sector enterprises. As part of his business, he has to visit the offices of his customers who are housed in crumbling offices because state-owned loss-making enterprises are severly resource constrained and cannot afford nice premises.
What brings you to Mumbai, I asked. He was here to attend the wedding of the son of a high-ranking official of XYZ (a loss-making state-owned enterprise which I will not identify to protect my brother’s life.) It was a grand affair attended by high-profile political figures. How can an official of XYZ, however high-ranking, afford such a grand affair, I asked. After all, these people have a salary of about $250 a month (plus some modest perks.) It is all part of a system, my brother replied.

The chief engineer of XYZ makes about $2 million a year in kick-backs from suppliers because the going rate is about 10% of the budget that the chief engineer controls. Just to put that figure in perspective, that is about 500 times the per capita GDP of India. When promoted to “technical director” from the rank of a chief engineer, the annual take of the person goes up to $5 million. Which is why the going rate for the promotion is about $3 million. Merely having one’s tenure as the technical director extended by six months costs about $1 million.

The private sector suppliers of these public-sector monopoly enterprises compete amongst themselves and the competition is primarily based on how much they are willing and able to give back in kick-backs to just be awarded the contracts that often range from a low $5 million to upwards of a $100 million. Merely being awarded contracts is not the end of the game. Getting paid for work done and material supplied is also a huge challenge. Without regular kick-backs, payments can take years and could easily doom the private sector supplier.

As I said, my brother is a small-time distributor for a bunch of suppliers. To get business from these public-sector enterprises, he has to deal with chief engineers and other such people in charge of making purchasing decisions. What he is compelled to do to run his business, I don’t really know and even if I did, I would leave it unsaid here.

The question that I persistently seek the answer to is this: Why is India so abjectly poor? There is no single factor, of course. But pervasive corruption has to be one of the most important factor among the mix of factors such as a poor culture, questionable ethical standards, a cargo-cult democracy, widespread illiteracy, stupid economic policies, and so on.

India is rated as one of the most corrupt countries with a “corruption perception index” (CPI) of 2.8 and is tied in the 90th place (out of 145 surveyed) with countries such as Gambia, Malawi, Mozambique, Russia, Nepal, and Tanzania according to Transparency International Corruption Perceptions Index 2004 which notes that “corruption is rampant in 60 countries, and the public sector is plagued by bribery”. Finland, New Zealand, Denmark, Iceland, Singapore, Sweden, Switzerland, Norway, Australia, and the Netherlands hold the first ten positions as the least corrupt countries. Haiti and Bangladesh are tied at rank 145 as the most corrupt countries. One cannot fail to appreciate the correlation between how corrupt a country is and how poor it is. Correlation hints at possible causation but in itself does not imply causation and definitely cannot tell in which direction the causation holds. Are corrupt countries corrupt because they are poor or is it that they are poor because they are corrupt? Perhaps there is some circularity in the causal chain and poverty and corruption are mutually cause and consequence.

Corruption leads to economic waste because it is an inefficient way of doing business. If 10% of capital expenditure that a public sector enterprise is paying for ends up in the pockets of its office-holders, it means that capital equipment does not get replaced or maintained as it should. If the supplier has to pay kick-backs to get business, it will have to cut corners in the quality or quantity of material supplied. Economic rent seeking behavior is not productive and in India millions of man-years must be wasted in unproductive rent-seeking. Public sector monopolies represent a resource sink precisely because they a ridden with corruption from top (the bureaucrats and politicians who appoint the high-ranking public sector officials) to the bottom (the clerk who will not push your file to the next desk without being paid his Rs 100).

So what is to be done? Surely lecturing school-children about the evils of corruption is not sufficient. First we need to be aware of what is going on and who is beind the going-ons. Investigative journalism comes to mind. Where are the watch-dogs and what are they doing? An informed citizenry is the best defense against the kleptocracy that exists today. Next, when investigation reveals corruption, the matter should be rigorously prosecuted to its logical end. And one must get one’s priorities clear when doing so, and not hound a poor milkman for diluting milk and believe that justice has been served.

Here is my proposition. Let it be known that any corruption above a certain figure (say, $1 million) is an offense that will attract the death penality. Between half a million to a quarter million, it will be mandatory 20 year rigorous imprisonment. Then every month, take the harsh step of convicting about 10 and hang them. In a year, the number of people who find corruption in the millions of dollars attractive will fall. This is simple economics: when the price goes up (death), the demand for the thing (getting one more million dollar in one’s Swiss bank account) goes down.

10 thoughts on “India, the World’s Largest Kleptocracy”

I had this question pricking me for sometime and having religiously read your blogs while, you are perhaps a right person to throw it to. I am probably the dumbest person you could ever meet when it comes to economics so if this question sounds outrageously stupid, I deserve it.

Assuming corruption is given in the context of India, all the money, even when they are in the hands of corrupt, should go back into the society in some form isnt it? As long as the money is not just stoved in as cash in lockers or set outside of india, its got to be there somewhere within India doing something? [could be in bank which lends it, could be in invested properties which creates jobs, could be in religious institutions which inturn directly/indirectly give it back to society]. My short stupid question is, whether it is in the hands of one corrupt official or 10 loyal private distributors, that moneys got to be doing something isnt it?

Even if it vaguely sounds like I dont care about the corrupt system, dont get me wrong. I just wanted understand in detail about this that you briefly eluded to. [economic waste, low quality etc]

Re. Sudhir’s comments: I’m no economist either but here is my take. If there were no kickbacks, money gets distributed in a wider and more incremental fashion. Under meritocratic pay-off, more people tend to make better distributed wealth, based on their hard work. Money distributed this way is likely to be spent more “normally” and usefully to the economy — for example the recepient building a house, upgrading their material conveniences etc. Also, by experiencing the rewards of hard work through such meritorious fashion, a good example is set for observers and future generations — achieving wealth generation the right royal way, where everyone benefits. On the other hand, corruption results in a more spiky wealth distribution graph, demoralizing the honest and hard working work-force, and encouraging abnormal spending among the immoral wealthy. Tucked away excesses, which do not help the native economy include ski-trips in the Alps and other such Western European jaunts; these basically help economies other than the country from which the money was looted. Such has been the pathetic story of sub-Saharan Africa. The Swiss economy has been flush with capital that represents blood money and other misappropriated sweat equity from the poorest of nations. There is scant economic benefit to the country being pillaged and exploited.

Re. Prashant’s comments, the inverse correlation between homicide and the death penalty has nothing to do with the fear of ultimate punishment (death) on financial corruption. It allows a civil crime to be treated on par with the worst criminal offense. A nation cannot send a stronger signal. I agree with Atanu: common sense dictates that setting appropriate examples, even if just a handfull, will make a corrupt lowlife think twice.

Is there any article providing a decent estimate of wealth infusion into western banks and economies from corrupt individuals in poor countries?

Prashant, I am serious about imposing the death penalty on those who steal very large amounts because the harm they inflict on society amounts to multiple murders. It is a white-collar criminal but the effect of their crime condemn many to an early death. Regarding your point about death penalty and homicide, Stan has already addressed it. I will elaborate later.

Stan, thanks for your detailed comments. Sudhar, will add to Stan’s comments. Uspeed, yes, I do believe that the Chinese take a more reasonable view of things and hang the bastards that steal mega-bucks.

The subjects sounds very familiar, so is the explanation of the logistics behind bribery. The solution is definitely an extreme, fit for China.

Bribery is a world phenomena, the degree varies. I believe its capped in developed world because citizens are informed enough to challenge it. We will get there some time, hope sooner. Ages back, I have traveled a lot between Bihar and Kerala by Train, days before we had automated reservation, even as a kid I could make out the $ required to get a seat/berth. Not just the $, itâ€™s the peoples respect for the ticket collector. One end he is man of power, at the other end is a regular govt. employee doing his service. Same analogy can be portrait about the Chief Engg., politicians, IAS officer, â€¦

The solution is to let citizens know what to do, when cornered by corrupts. Remember over a decade back tele-serial â€œRajaniâ€, that was great. With the internet media, its matter of time to know enough to clamp down on the corrupts. â€œThelkaâ€ was good example.

agree with your concept of death penalty for the wrong doers. but tell me, whos going to clear the cases. with already 0.3 million cases in the courts and rotting, estimates has it that it will take another 35 years to clear all of them off.

i agree corruption is the biggest hindrance in the progress of india, but the bigger malice is the judiciary which has not been able to live upto its image of a justice providing institution. as long as a moral institution of a land doesnt stand the test, the morality of the ppl is gravely in danger. currently we are doing a balancing act, trying to define a morality by our own means in the absence of a higher institution.

a good man who doesnt do good is dangerous to the society than a bad guy who does the harm!

Unfortunately, the politicians who will have to pass the law in question are the very ones who are the most corrupt. Little chance they will pass a law to hang themselves, but they will certainly pass laws to imprison milkmen